Broadcom options backdating indictment
In the mid-2000s, an investigation by the Securities and Exchange Commission resulted in the resignations of more than 50 senior executives and CEOs at firms across the industry spectrum from restaurants and recruiters to home builders and healthcare.High-profile companies including Apple Computers, United Health Group, Broadcom, Staples, Cheesecake Factory, KB Homes, Monster.com, Brocade Communications Systems, Inc., Vitesse Semiconductor Corp.I count no fewer than 38 top executives at 19 high-tech companies that have bit the dust over this stuff.We're talking top executives at big-name companies like Apple, Altera, Broadcom, Brocade, Cirrus Logic, Comverse, KLA-Tencor, Maxim, Mc Afee, Rambus, Sanmina-SCI, Take Two, Trident, Verisign, and Vitesse. That's serious fallout considering that options backdating is legit as long as the company reports it and accounts for it accurately.You see, if you backdate stock options to a date when the price of the stock was lower, then the options are "in-the-money" when granted.That means the company incurs an expense equal to the difference in the share price between the two dates.Although this practice gave the senior executives significant stock holdings, since the grant was issued at-the-money, the share price had to appreciate before the executives would actually earn a profit.A 1982 amendment to the tax code created an incentive for executives and their employers to work together to break the law.
A Pulitzer Prize winning story published in the .) As a result, firms restated earnings, fines were paid and executives lost their jobs - and their credibility.
Since at-the-money options require a firm's share price to appreciate in order for the executives to profit, they meet the criteria for performance based-compensation and therefore qualify as a tax deduction.
When senior executives realized that they could look backwards for the date during which their firm's stock was at its lowest trading price and then pretend that was the date they were issued the stock grants, a scandal was born.
If you cover it up and fail to report that expense, the way Apple's folks allegedly did, well, that amounts to accounting fraud.
While a few of those 38 terminations may turn out to be the result of such activity, it's likely that the vast majority fell on their swords to avoid sullying the good names of their companies.
A business run without integrity is a scary proposition.